How Does a Reverse Mortgage Get Paid Back?
Reverse mortgages allow homeowners to receive money from their lenders based on the value of their home and the amount of equity in their homes. Reverse mortgages are available to people who are at least 62 years old and who have paid off their homes. However, people who are at least that age and owe a small amount on their mortgages also may qualify.
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Expenses
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You first need to determine how expenses are handled for reverse mortgages to understand how the loans are repaid. All the money a person receives from a reverse mortgage is tax free. Homeowners with reverse mortgages retain the titles to their homes, and they remain responsible for paying their homeowner's insurance, property taxes and maintenance costs. The amount owed on a reverse mortgage increases over time because interest is charged and added to the principal originally borrowed each month.
Home Value
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People who take out reverse mortgages typically don't owe more than their homes are worth, despite the accrual of interest. That's because reverse-mortgage contracts usually include a nonrecourse clause, which prevents the borrower or the borrower's estate from paying more than the home's value when the loan is repaid. Repayment is required if the home is sold, is no longer the borrower's primary residence or the borrower dies. In such cases, the account withdrawals, interest charges and fees are deducted from the proceeds received from selling the home, and any excess proceeds are given to borrowers or their heirs. Therefore, people should consider that reverse mortgages can use up most of the equity in their homes, leaving few or no property assets for the borrowers or heirs.
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HECMs
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The amount needed to repay a reverse mortgage is linked to the appraised value of a home. However, even high-valued homes face limitations. The most common reverse mortgages are insured by the U.S. federal government, and the maximum amount of equity applied to government-backed reverse mortgages in 2011 is $625,500. Federally-insured reverse mortgages are called Home Equity Conversion Mortgages or HECMs. A Standard HECM and a Saver HECM allow homeowners to borrow different percentages of their equity.
Considerations
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Reverse-mortgage fees will reduce the amount of home equity you have available to borrow against. The Standard HECM and the Saver HECM require payment of a monthly insurance premium of 1.25 percent, which is deducted from a homeowner's equity to pay for the Federal Housing Administration insurance on the loans. Both loans require upfront fees, which are 2 percent for the Standard HECM and .01 percent for the Saver HECM. The latter fee is less because the Saver HECM.allows homeowners access to about 20 percent less equity than the Standard HECM.
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